Tech giants will soon have to pay taxes to the country they operate from as G-20 nations have a plan in place to block the profit-shifting route to tax havens from next year.
The G-20 endorsement of BEPS project, particularly Action Plan 1 relating to taxation of digital economy, will ultimately benefit emerging economies such as India in a big way.
Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. The higher reliance on corporate income tax by developing countries means they suffer from BEPS disproportionately.
At present, many tech companies provide their services in countries such as India but choose to book sales in low-tax nations like Ireland.
About 40 per cent of multinational profits, mostly by tech giants, are shifted to tax havens globally each year. Economists Thomas Tørsløv, Ludvig Wier and Gabriel Zucman estimated that revenue loss from corporate tax globally is around 200 billion USD per year (approximately 10% of corporate tax revenue globally). Unofficial estimates put India’s tax evasion figures at up to 10 per cent of this total figure.
In a high-profile meeting at Fukuoka in Japan on Sunday, G-20 finance ministers, along with India, have agreed to accelerate cross-border corporate tax by 2020. As the fastest growing digital economy, India will be a big beneficiary of this new tax treatment.
The new tax rule is expected to alter foreign capital flow, especially foreign direct investment (FDI) as it is expected to stop tax avoidance strategies of multinational corporations (MNCs).
India is keen to protect the tax base, which could be a significant relief to manage budget deficits. Union minister for finance and corporate affairs Nirmala Sitharaman noted the urgency to fix the issue of determining right nexus and profit allocation solution for taxing the profits made by digital economy companies, a finance ministry statement said.
Appreciating the significant progress made under the taxation agenda including Base Erosion and Profit Shifitng (BEPS), tax challenges from digital economy and exchange of information under the aegis of G20, Sitharaman congratulated the Japanese Presidency for successfully carrying these tasks forward, the statement added.
In a meeting in Paris late last month, 129 member countries of OECD and G20, apart from India, adopted a Programme of Work’ laying out a process for reaching a new global agreement for taxing digital companies.
The first potential solution is to determine where tax should be paid and on what basis (nexus). The other option could be based on the portion of profits, which should also be taxed in the countries where users are located (profit allocation).
The digital footprint is witnessing a double-digit growth the world over and there would be much larger volume of cross-border transactions from such economies in the coming years.
Given the fact that OECD has estimated revenue loss to the tune of USD 240 billion annually through tax avoidance, a sizeable chunk of loss is accounted by the developing economies as well. I hope that the final BEPS report by 2020 does justice to the revenue needs of developing countries as well, apart from the rich economies, said Sahlendra Kumar, MD, TIOL, a tax consultant company.